The impact of nonprofit organization boards on revenue diversity.

Author:Lai, Christine A.
Position:Report
 
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  1. INTRODUCTION

    Governance functions of nonprofit organizations (NPOs) are performed by their boards of directors. It is the responsibility of the board to ensure that the organization adheres to its mission and is fiscally responsible. Because stakeholders of NPOs often evaluate the organizations by the composition of their boards, the educational background and managerial experience of the board members provide legitimacy to the NPO (Abzug and Galaskiewicz, 2001). Board functions may include mission driven activities such as strategic planning and making policies, monitoring organization management and staff, acquiring and managing funds, and ensuring that ethical and legal practices are followed (Widmer, 1993). While available research suggests that NPO board of directors have an impact on organizational effectiveness, there is no clear understanding on how this occurs (Herman and Renz, 1999).

  2. LITERATURE REVIEW

    Previous studies of for-profit organizations often evaluate firm performance using financial ratios. In a study conducted by Hermalin and Weisbach (1991), the authors examined the board of directors' composition and ownership structure of 142 NYSE firms. Comparing proportions of inside directors (management) to outside directors (non-management) with financial ratios, they discovered that there was no relation between board composition and financial performance. However, Hermalin and Weisbach (1991) note that poor performance leads to changes in board membership and these changes may bias their study's results. Yermack (1996) found a significant negative relationship when he examined the board composition of Fortune 500 firms. When comparing board size with firm value, Yermack (1996) found financial ratios related to profitability and operating efficiency declined as board size grew.

    NPO effectiveness is more difficult to assess than for-profit firm effectiveness (MillerMillesen, 2003). Herman and Renz (1999) suggest that NPO effectiveness is not objective, but instead a social construction such as organizational effectiveness of goal attainment; they argue that NPO effectiveness can be observed only when compared to other NPOs. While NPO effectiveness is multidimensional, little empirical work has been done to identify these dimensions. Because NPO boards and organizations must function in different environments, it is difficult to uncover the practices and activities that assure board effectiveness (Herman and Renz, 1999), yet scholars have attempted to come up with a formula for best board governance and therefore positive organizational outcomes (Miller-Millesen, 2003).

    In an attempt to improve the performance of their organizations, managers of NPOs structure their board of directors to attain organizational goals. Widmer's (1993) study reveals that NPOs recruit board members to serve as experts in their respective fields to perform the work of the board and sometimes the organization. As a result, board nominating committees and board orientation programs need to emphasize selections criteria and the role of the board as guardians of the organization. The board must maintain relationships outside the NPO to gather and interpret information provided by external constituencies; therefore a board composed of members that are influential in the external environment is more effective in gathering relevant information (Miller-Millesen, 2003). Brown and Iverson (2004) suggest boards have the ability to decentralize decision making and interpret environmental opportunities hence, boards are critical to maintaining resource streams either through their network connections or informed decision making. A major issue in NPO related research is board of directors composition. Abzug and Galaskiewicz (2001) studied board compositions of NPOs for the years 1931, 1961, and 1991 and discovered that the member level of education increased over time while the proportion of professionals decreased slightly; however this may be due to the increase of managerial representation. Their study reveals that high status occupations were consistently important over the 60 year time frame. Herman and Tulipapa (1985) also found that the most effective NPO boards are composed of "the community's corporate, professional and social elite". These "power boards" provide the NPOs with knowledge and skills to effectively contribute to the planning and control of the organization. Because the success of NPOs is related to its ability to attract local giving, board members and therefore board composition is a strategic means to gain access to financial resources.

    While Herman and Renz (2000) find that boards with a higher ratio of more prestigious members were determined to be more effective, they also suggest that board involvement in various activities may be used to measure board effectiveness. Herman and Renz (2000) studied 46 health and welfare service providers along with 18 providers of service to developmentally disabled persons. Compiling a list of 25 recommended board activities, and creating a Board-practices index, the authors discover that more effective NPO boards engage in a greater number of recommended board practices. Herman and Renz (2000) collected judgment data from multiple stakeholders of the NPOs under investigation. Measuring the perceived effectiveness of executives, board members, and staff members, the authors conclude that the criteria stakeholders regarded as more important, reflected inputs of board members rather than outputs or activity results.

    A small but growing body of research on nonprofit governance demonstrates increased interest in understanding rather than describing NPO boards. Institutional theory suggests that NPOs may create sub-committees not because they have been proven to be more effective, but because NPOs believe that is the normal structure (Guo and Acar, 2005; Stone, 1989; Miller-Millesen, 2003). Guo's and Acar's survey study of 95 urban charitable organizations and their propensity to engage in formal collaborations reveals that organizations will increase the degree of collaboration formality as NPOs increase in age or budget size. Collaboration formality will also increase if the NPO relies on few government funding sources or has board linkages with other NPOs. Guo and Acar, (2005) found that education and research NPOs and NPOs in the social service industry are less likely to have formal collaborations. Collaborative activities may include information sharing, referral of clients, sharing of office space or partaking in joint programs. Collaborations can help acquire scarce or vital resources.

    Stone (1989) and...

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